Taylor: Brad Parscale’s connections to obscure penny stock company

Trump 2020 campaign manager Brad Parscale is seen before the start of an October rally featuring President Donald Trump in Southaven, Miss. Although he lives in Florida now, Parscale maintains deep ties to an obscure but publicly -traded web, design and data-based business in San Antonio.

Photo: Mandel Ngan /AFP /Getty Images

Brad Parscale is the highest-profile tech entrepreneur to emerge from San Antonio in the past decade.

His career has skyrocketed over the past four years. He designed a $1,500 Trump campaign website in 2015. He served as digital director and was the largest billing vendor to Project Alamo in support of Donald Trump’s 2016 presidential campaign. And since February 2018, he’s managed Trump’s 2020 reelection push.

Although he lives in Florida now, Parscale maintains deep ties to an obscure but publicly traded web, design and data-based business in San Antonio.

This business, under the umbrella Cloud Commerce, is one of the mysteries of the Brad Parscale story. He serves on the company’s board of directors.

In a deal announced Aug. 1, 2017, Parscale sold his web design business to Cloud Commerce for a reported $10 million.

That transaction never made sense from a financial perspective.

Cloud Commerce isn’t traded on a major exchange. It has long existed in the murkier market of penny stocks. With 137.5 million shares outstanding, “trading” at a price between 0.0027 and 0.02 cent in the past year, the value of the company could be mathematically described as between $370,000 and $2.7 million. In the week before Parscale sold his company in 2017, Cloud Commerce’s shares traded at $0.01 for a market value of $1.37 million.

But trading volume on the shares typically doesn’t break $1,000 per day, which means that a true market value of the company is nearly impossible to determine.

It’s worth considering the strange world of penny stocks that the company comes from.

A “penny stock” is any publicly owned company whose shares trade below $5 a share. Any stock trading below $2 in the case of the Nasdaq — or $1 in the case of the New York Stock Exchange — risks losing their listing on a major stock exchange. But Cloud Commerce shares have never come close to being eligible for listing on an exchange.

Cloud Commerce has lost money every year since its current management took over in 2012. Losses totaled less than $1 million each in 2012, 2013 and 2014 but have since accelerated to at least $2 million per year. Since 2016, losses have averaged more than $4 million a year. Because it’s lost money every year, the company has never paid federal taxes.

Penny stocks like this don’t really make sense as investments but are often vehicles for “pump and dump” schemes in which operators hype thinly traded shares to attract buyers and then sell the stock at inflated prices.

Robert R. Johnson, a finance professor at Creighton University in Omaha, Neb., points out that “for the vast majority of investors, investing in penny stocks is wholly unsuitable.”

“Penny stocks are the Wild West of the financial landscape,” he said. “Investors should simply expect to lose their investment in penny stocks. There is an immense amount of fraud in the penny stock world.”

For its part, Cloud Commerce is a loss-making firm with strange financial arrangements. As Jacob Frenkel, former SEC regulator, said in an Associated Press story about Cloud Commerce: “What about this company isn’t a red flag?”

The strangeness of Parscale’s sale to a penny stock company began with the announcement that Parscale and his San Antonio-based partner Jill Giles had sold their business to Cloud Commerce — strange because the value of the acquiring company at the time, as measured by market capitalization, was less than $1.5 million.

So how could Cloud Commerce pay $10 million when it loses money every year and was supposedly worth not quite $1.5 million?

The quick answer: It didn’t pay $10 million.

Instead, the purchase was structured like so:

According to public filings, Parscale received 90,000 “Series D preferred shares,” each convertible into 2,500 common shares in Cloud Commerce. All told, the preferred shares gave Parscale the right to accumulate 225 million common shares of Cloud Commerce. In other words, more shares than were currently outstanding in the company.

If he converted all his preferred shares and other executives did not, he would become the majority shareholder in the company, with 225 million shares. Parscale was barred from selling for two years — that is, until August 2019.

Parscale seems to have been excited about the possibilities of owning shares in his penny stock firm in the days following the sale. On Aug. 8, 2017, he touted the stock’s rise from 0.01 cent to 0.05 cent, tweeting: “Big week for the parent company of my commercial business @cloudcommerceco. Stock up 500%”

In the announcement of the sale, the 90,000 Series D preferreds were declared to be worth $9 million.

How? Just because. It’s as real as if I wrote down “$9 million” on a piece of paper, then handed it to you. “Here,” I’d say conspiratorially, sliding it across the table, “I’m giving you $9 million. Trust me. See? It says $9 million right here on the paper.”

It is true that if the shares had remained at 0.04 cent or above, Parscale could have, sort of, claimed his stake was theoretically worth $9 million, two years hence. But for the past year the shares have rarely broken 0.02 cent.

The $10 million announcement also mentioned an extra payment of $1 million in cash to be paid to Parscale. Except that Cloud Commerce doesn’t have that kind of money.

So, six months later, when it still had not paid Parscale any cash, it began to make arrangements. According to an SEC filing in February 2018, the company made an agreement with Parscale to pay $1 million in the form of a promissory note, an IOU, in monthly installments of $85,149.90.

Interestingly, we know from later filings that Cloud Commerce also did not pay that note in cash to Parscale. Instead, it produced an invoice in November 2018 detailing 68 separate services Cloud Commerce performed for Parscale Strategy — his separate political business based in Florida — through 2018. Those services netted out money owed to Parscale for the purchase.

In the week following the sale’s announcement, when Parscale tweeted about the 500 percent rise in share price, the deal looked to me like it could be just another pump and dump. It has not made any sense to me since then.

Recently, however, Cloud Commerce has announced a new plan to fund itself. I’ll explain in a future column.

Michael Taylor is a columnist for the San Antonio Express-News and author of “The Financial Rules For New College Graduates.”